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Bitter Medicine

Appeared in the National Review Online
Release Date: March 29, 2004
The wave of popular disgust at high prescription-drug prices in the United States has caused many politicians to propose normalizing the currently illegal "reimporting" of prescription drugs from Canada, where they are often less expensive. Criticizing research-based pharmaceutical manufacturers for making profits (it’s an easy way to get seniors’ votes), these politicians admit that reimporting drugs from Canada is a stalking horse: What they really want is for the government to fix prices in the U.S. More surprising are the politicians who are normally considered free-market types in the ranks of those advocating reimporting. The latter have been conned by the notion that reimporting is a valid type of international free trade.

This market is not illustrative of free trade, but rather of "parallel trade." The key difference between parallel trade and free trade is that the latter occurs with the voluntary participation of all parties. Governments support this by signing treaties (such as the North American Free Trade Agreement) guaranteeing that they will treat foreign businesses the same as domestic ones. This gives firms confidence that they can operate across borders according to terms that they freely negotiate with buyers.

On the other hand, parallel trade can only take place when laws guarantee the opposite: Manufacturers are forbidden from negotiating terms of sale with buyers that differ from the political goals of the government of the day.

Prices for patented prescription drugs are generally more expensive in the United States owing partly to Canada’s low purchasing power, as well as to different government health care policies.

Drug makers distribute in both countries. Obviously, they do not want Canadian pharmacies diverting medicines from patients in the lower-priced country to the higher-priced country. When some drug makers asked wholesalers to cooperate with them in cutting off the gray market, the Manitoba provincial government unsuccessfully tried to charge the drug makers with anti-competitive practice. The government tried to force drug makers to supply gray-market pharmacies under conditions that the drug makers did not voluntarily accept. Thus, Manitoba was violating free-trade principles by attempting to use state power to force the inventors of the medicines to act against their own interests.

Populist American politicians increasingly support legalization of wholesale reimporting (by government agencies, not just by individuals) of prescription drugs from Canada. Wholesale reimporting will motivate drug makers to either restrict their supplies or raise their prices in Canada. Therefore, pro-reimporting American politicians write clauses into their bills that will try to outlaw drug makers doing this. But if it takes state power to force manufacturers to do what politicians want, then this cannot be free trade. (Drug makers charge hospitals and nursing homes much lower prices than retail pharmacies in the U.S., and the law enforces contracts that prevent wholesalers from arbitraging between the two markets. Of course, American politicians don’t propose laws to violate these contracts!)

Furthermore, removing manufacturers’ interests from global-distribution channels means that the U.S. government will have to increase safety requirements greatly — because manufacturers will have less incentive to do so. As Bob Goldberg of the Manhattan Institute has pointed out, Republican Congressman Gil Gutknecht, a supporter of parallel trade, would require that every prescription-drug package incorporate "overt optically variable counterfeit-resistant technologies," whatever that means. True free trade calls for less government regulation, not more.

Another example: Suppose a restaurant offers an early-bird special for diners who sit before 6 P.M., and I stroll in at 8 P.M. and ask for the same price. The restaurant declines, and instead of either paying full price or taking my custom elsewhere, I lobby the government to force the restaurant to change its pricing policy. Obviously, this is not free trade. Similarly, state action that prevents drug makers from segmenting markets is not free trade.

Moreover, patent laws are national, and some drugs that are patented in the U.S. are not in Canada (and vice versa). Obviously, allowing non-patented medicines to compete against patented ones is a violation of intellectual property.

Pharmaceutical free trade means that manufacturers from around the world can compete globally. In the last few years, countries like Canada have improved their patent laws, thereby allowing pharmaceutical manufacturers to operate where they were not previously welcome. A German company that invents a new medicine can manufacture it in Ireland, package it in the United States, and sell it in Canada. A Canadian patient can use medicines invented by companies in Britain, Sweden, or France. This free trade needs laws that protect intellectual property and enforce contractual obligations between drug makers, wholesalers, and pharmacies across borders. Without them, manufacturers will shrink from international trade and patients will be stuck with far less choice of medicines.